Private Equity: A Primer for Physicians
Golden parachutes, golden handcuffs, or something else?
“My group has been approached by a private equity company - it sounds like a great deal! Any questions I should ask?”
Whether it be through one on one discussions or through the Physician Side gigs group, I’ve found myself having this conversation with increasing frequency. Part of the reason for that is because I find it fascinating, albeit also sometimes terrifying. As the trend towards consolidation in the healthcare space accelerates, I’ve been watching several sectors with a lot of interest, but I think that the one that’s most poorly understood by physicians is private equity.
So, here’s (a very basic, as in, initial starting point) overview of what I think physicians need to understand about private equity groups, since they are rapidly becoming a bigger player in the healthcare space.
First off, what is private equity? Private equity groups are essentially investment firms that take a source of capital (this can be from groups of individuals, institutional money like pension funds or endowments, or others) and then directly invest that money into a firm, or for physicians, into our groups. It has similar goals to investment banking, but is different in how it does it (see here). The model is to take a management fee from the money, followed by a share of the profits when they sell. The investment horizon is usually a few years in order to pay back investors the bigger returns, so you should know when talking to them what their long term plan is with your group in regards to resale.
What's their role in healthcare, and what's in it for them? In the recent past, private equity has taken an increased interest in investing in physician practices. The model is to lower overhead and improve efficiency within a practice or group of practices (for example by consolidating resources and internalizing processes that may be outsourced previously, such as billing). After making these groups more profitable, they will either continue to grow by taking on more practices under a similar model or sell some or all of the group for a profit.
What's in it for the physician? There are a few different reasons why groups may choose to sell. The obvious is the buyout money - which can be especially appealing to physicians at the end of their careers (the golden parachute referenced above). Another reason often cited is the need to contain overhead in regards to billing, EMR, etc, and remain economically viable in this era of consolidation. Many times the practice sees an opportunity to grow if provided with an infusion of capital, and the private equity group gives partners shares that are proposed to increase in value with growth (more on that later).
What kinds of practices are they looking for? Usually initially these will be large groups that are already very profitable and lend themselves to scalability. Sometimes, they’re looking for ‘platform practices,’ which will serve as models for other smaller groups (which they will subsequently find and make more profitable by bringing them under the larger group's umbrella/successful model). Currently, most private equity attention has been driven towards dermatology, anesthesia, radiology, emergency medicine, and ophthalmology (coincidentally, encompassing the ROAD specialties). Increasingly, they are turning their attention to GI, orthopedics, and urology, with others likely to follow.
Do they own you? There are different structures/extents to buyouts. If you are one of these platform practices, they usually buy a majority stake, and then provide capital and business expertise to expand. If you’re one of the smaller groups adding on to the platform practice, they tend to be either complete or significant majority buyouts. There’s also some different arrangements where they buy a small share and infuse capital into the practice and help it grow, but I personally don’t hear about these as often.
What's the process? Well, they first identify practices that they’re interested in. They then approach them, do some basic research, make an offer, and then if both parties agree, will go into a deeper phase of due diligence, just like with buying a house.
How much will they pay for your practice? It depends on a lot of factors. One term you should understand is EBITDA - Earnings before Interests, Taxes, Depreciation, and Amortization. Most buyouts utilize a multiple of this number in calculating the worth of your practice. That multiple is very different depending on the particular situation. There are also many other factors, like location, growth potential, demand, and of course, what the partners of the group will accept, but EBITDA is one of the more objective ways of valuing a practice. If the whole thing is interesting to you, like it is to me, this book is actually a pretty good read.
What about shares? They’ve told us that the shares are going to provide a great return as the company continues to grow. Maybe, maybe not. In some ways, I see them as similar to buying Bitcoin - don't count on getting anything substantial back, but they may be very profitable. Shares can be diluted, and there’s no guaranteed ROI if things don't go well. My personal opinion is that you shouldn’t consider the shares when considering the buyout price, because there’s too many variables to attribute them a monetary value. Having these shares can also be burdensome post-buyout, because you will feel pressured to help them increase the value of these shares (think carrot), potentially requiring a lot of (non-compensated) hustling on your end.
What happens to me post buyout? You usually have to stay for a certain number of years to keep things stable and help with the growth. Often times, your salary will take a hit, which is often seen as a pay cut in exchange for not having to run the practice. You are giving up your ownership (or at least majority ownership) in most cases, so you have to be prepared to be an employee, and deal with everything that comes along with that. Also keep in mind that your practice is going to be run from a much more business related perspective than most physicians run their groups from, and you may not always be in agreement with those policies. In a worst case scenario, it may be that the decision could be made to let you against your will.
Is it worth it? This is a long discussion, and this post is already getting long. Join the Physician Side Gigs Facebook group if you want to continue it. There’s a lot of factors on the personal, organizational, and societal levels to take into consideration. On the surface, a few million dollars may seem like hitting the lottery. Whether it really is depends on your stage of practice, what your autonomy means to you, your plans with what you would do with that money, how you feel about consolidation in the healthcare space, and how your professional life changes on a daily basis, amongst other things.
Any other questions? I’ll try and address them in a future post, if there’s interest. Sign up for the newsletter if you want to hear more from my planned series on the changing healthcare landscape and the business of medicine!